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Friday, November 1, 2013

More subsidy cuts to come

PETALING JAYA (Oct 28, 2013): The government is likely to announce more cuts to subsidies – the latest being the removal of the 34 sen subsidy per kilogramme for sugar in last Friday's Budget 2014 – as it tries to trim its budget deficit further, said economists.

Last September, the subsidy on petrol and diesel was cut by 20 sen a litre, which reportedly would save the government RM3.3 billion per year.

Some analysts are now anticipating that the government may allow Tenaga Nasional Bhd to implement the fuel cost pass-through formula soon, which would see consumers paying more for electricity if there is an increase in fuel costs.

This follows a mention in Budget 2014 which stated that the government would gradually restructure the subsidy programme, implying that it could still roll back subsidies post-budget, just like how it had cut fuel subsidies and raised the excise duty for cigarettes prior to the budget announcement.

Alliance Research Sdn Bhd expects to see more fiscal consolidations to come in the next few quarters, among other things through accelerated subsidy rationalisation.

"If the rumours about shifting civil servants' housing loans from federal government's balance sheet materialises, then the debt-to-GDP level could fall below 50%," its economists Manokaran Mottain and Khairul Anwar Nor Md said in a report on Saturday.

Alliance Research believes that the fiscal deficit is on track to be reduced to 3% of the gross domestic product (GDP) by 2015 from 4.5% last year, on the assumption that leakages from the government spending can be plugged immediately.

"In the case of subsidies, the government aims to reduce the total allocation from RM44 billion to RM36 billion this year, which will largely come from a RM7 billion saving from the September 2013 rationalisation and the anticipated subsidy adjustment, which we believe will materialise over the three to six months.

"In addition, nearly RM1 billion will be saved from subsidy removal in sugar," said the research firm.

Alliance Research is forecasting the full-year economic growth of 4.5% in 2013, at the lower end of the government's revised forecast of 4.5% to 5% in 2013.

"For 2014, we expect growth to pick up to 5%, underpinned by robust domestic demand and improving external conditions," it said, adding that it is maintaining its inflation forecast of 2.5% this year and 3.2% in 2014 due to the impact from further subsidy cuts.

"The OPR (Overnight Policy Rate) is expected to be increased by 25 bps to 3.25% by mid-2014 but will remain accommodative to promote growth in a domestic-driven environment," it added.

RHB Research Institute Sdn Bhd said Budget 2014 reiterated the government's commitment to subsidy rationalisation although there were no details on the timeline albeit that it would be gradual.

"While this leaves some wriggle room for the government, it is somewhat disappointing considering its weak track record on execution. Fuel subsidies are running at RM20 billion to RM25 billion per year, while Petroliam Nasional Bhd subsidises gas for power and industrial users to the tune of about RM16 billion per year," it said.

RHB Research also noted the absence of measures to raise duties in the brewery and gaming sectors given the off-budget 14% increase in excise duties for tobacco products last month.

"There was also nothing in the budget pertaining to the automotive sector given the impending announcement of the long-awaited National Automotive Policy (NAP)," it added. Recent reports said the NAP could likely be announced in mid-November.

"However, this could be offset by lower vehicle prices if the government's strategy to streamline the industry and boost competition bears fruit," said RHB Research.

The research firm also believes that the unveiling of the 6% goods and services tax (GST), to begin in April 2015, could potentially push up inflation to around 4.7% in 2015 from the 2.8% projected for 2014 and 2.2% estimated for 2013.

OCBC Bank economists Selena Ling believes that a 4.7% economic growth is achievable for the full year, albeit this is at the lower end of the official 4.5-5% range, driven by private investment and domestic consumption amid the modest global demand conditions.

"Our 2014 growth forecast is 5.2%, which is inside the official growth forecast range. The premise is an improving outlook for exports which is tipped to expand by 2.5%, while the services and construction sectors are expected to grow by 5.7% and 9.6% respectively," she added.

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